Mexico ETFs Back on Track? - ETF News And Commentary

Latin America, dominated mostly by Brazil, seems to have got a new pin-up in the form of Mexico. This second largest economy of Latin America also turned out to be one of the strongest economies in 2012 and the early part of 2013. Then, like all its emerging markets cousins, Mexico suffered taper-induced sell-offs, though the severity was endurable.

The year 2014 also did not bring about strong growth numbers until the second quarter. Mexico logged a better-than-expected GDP growth number in Q2 reflecting better export demand and domestic consumption. GDP inched up 1% quarter on quarter in Q2.  On a year-over-year basis, GDP growth of 1.6% was lower than 1.9% recorded in Q1 due to tough comparison (read: Mexican ETFs in Focus for Cinco de Mayo).

The revival in the U.S. – Mexico's key export destination – helped it post strong growth. Wall Street noted that solid auto sales in the U.S. and Canada that in turn led to record production and export figures for Mexico's auto industry.

The economy looks even more promising. Deputy Finance Minister of Mexico expects growth to speed up in the second half of the year supported by increased public spending and a cut in the key interest rate to the record-low level for the first time in more than 1.5 years in June (read: Mexico ETFs in Focus Following Surprise Rate Cut).  

At present, the government reiterated the growth forecast for 2014 at 2.7%. Also, with the U.S. accounting for more than 80% of Mexico's growth (as noted by Bloomberg), a continued wining momentum in the U.S. should play an important role in Mexico's growth story (read: Will the Mexico ETF Shine in 2014?).

Apart from this, open market policies, fiscal and labor reforms, prudent macroeconomic measures and the rising middle class population will hopefully help Mexico to deliver stronger numbers in the coming months. The nation is also emerging as an off-shoring hub thanks to the rise of wages in China and the proximity of Mexican factories to the U.S.

How to Play?

Overall, events are shaping up quite nicely for the Mexican economy, suggesting that a look at their equities may be a good idea. And since the country is so dependent on America, it can be thought of as a high beta bet on the domestic market as well. The main way to target the country in the ETF form is via iShares MSCI Mexico Capped Investable Market Index Fund (EWW).

EWW in Focus

This is the most popular Mexico ETF trading in the U.S. The $3.28 billion-fund sees great volume of about 1.9 million shares a day leading to a tight bid/ask spread. The fund has about 59 stocks in its basket, with a big weighting to the top component America Movil which makes up just over 15% of the total assets. Financials is the top sector in the fund with about 21.7% followed by Consumer Staples (20.3%) and Telecom (15.9%). The expense ratio of the fund is 0.47%.

Though EWW started 2014 on a soft note, the fund slowly picked up momentum. However, given some of the long-term encouraging drivers described above, the fund could return to stable growth.

EWW has gained about 5.5% so far this year (as of August 27, 2014). EWW currently carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (See all Latin American ETFs Here).

For investors seeking currency hedging, we see the following fund as a lucrative option:

db X-trackers MSCI Mexico Hedged Equity Fund (DBMX)

This ETF is a new joinee in the Mexico ETF space, having debuted this January. This currency-hedged ETF has an asset base of just $5 million. The fund charges 50 bps in fees. DBMX looks to rule out the impact of the Mexican peso on the fund's returns.

Here also, America Movil accounts for about 15.5% of the fund.  However, unlike EWW, Telecom takes up top spot here with about 25% focus followed by Financials (25%) and Consumer Staples (15.6%) (see 3 More Hedged ETFs Hit the Market from Deutsche Bank).

In a weak peso scenario, this ETF might outdo its popular counterpart EWW. So far, the fund has returned about 12%.

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